Fannie Mae and Freddie Mac’s federal regulator is renegotiating the companies’ financing plan with the U.S. Treasury Department and may seek an increase to their $400 billion federal lifeline before the end of the year, according to people familiar with the talks.
Treasury and Federal Housing Finance Agency officials are also debating whether to lower the cost of the companies’ dividend payments on their borrowings from Treasury, according to these people, who requested not to be identified describing the internal deliberations.
Fannie Mae and Freddie Mac, the largest sources of mortgage money in the U.S., have used $111.6 billion of their $400 billion in backup financing in less than a year. The companies say their 10 percent annual dividend payment, which comes to about $5 billion apiece, costs more than either have earned in most years and adds to their draws on Treasury.
FHFA spokeswoman Stefanie Mullin, Treasury spokeswoman Meg Reilly, Freddie Mac spokesman Doug Duvall and Fannie Mae spokesman Brian Faith declined to comment.
The financing plan instituted for Fannie Mae and Freddie Mac requires them to reduce their $1.57 trillion combined mortgage portfolios by 10 percent annually starting next year and caps their debt issuance at 120 percent of their assets.
The Treasury and Federal Housing Finance Agency seized control of the mortgage-finance companies almost 16 months ago amid fears the two were at risk of failing.
$400 Billion Lifeline
Officials set up a $200 billion lifeline with the Treasury, which was doubled in May, to keep the companies solvent. If they exhaust that backstop, regulators will be required to place them into receivership.
Treasury officials aren’t likely to take the chance of allowing the companies to fall into receivership, which is a bankruptcy-like process that would increase the companies’ debt costs and disrupt the mortgage markets, said Paul Miller, a former examiner for the Federal Reserve who now analyzes the banking and mortgage industry for FBR Capital Markets in Arlington, Virginia.
“The Treasury has shown that their pain threshold is almost” non-existent, and the housing “market is still very fragile,” Miller said in an interview.
The companies have said $200 billion apiece may not be enough support. The Treasury Department is facing a Dec. 31 deadline to increase that amount without congressional approval.
While Treasury officials are free to renegotiate other terms of the deal, such as the dividend payment and restrictions on debt issuance, at any time, Congress set a deadline of the end of this year on the department’s ability to invest in the companies.
“Treasury should be giving confidence to the markets that they will take care of it,” said Rajiv Setia, a fixed income analyst for Barclays Capital in New York. “You increase the backstop and it removes the element of doubt.”
Washington-based Fannie Mae, which has lost $120.5 billion over the last nine quarters, has requested $60.9 billion from the Treasury this year. McLean, Virginia-based Freddie Mac has tapped $50.7 billion in government capital since November 2008 and recorded $67.9 billion in cumulative losses over the last nine quarters amid a three-year housing slump.
The companies are an integral part of President Barack Obama’s housing-relief plan and have been pushed by the government to help more homeowners modify or refinance their loans to more affordable terms to curb foreclosures. The government-sponsored enterprises, or GSEs, own or guarantee about $5.5 trillion of the $11 trillion in U.S. residential mortgage debt.
“With the GSEs being used as public policy tools, it is impossible to quantify with certainty what losses might be in a stress scenario, as the rules of the game might keep shifting,” Setia said.